Amazon.com Posts Record Q2 Profit Amid COVID-19 Pandemic; Buy with Target Price of $3500

Amazon.com, the world’s largest online retailer, reported that its profit hit an all-time high in the second quarter as online sales surged amid the COVID-19 pandemic, sending its shares up 5% to $3,204.60 in after-hours trade on Thursday.

The multinational technology company based in Seattle said its net sales rose 40% to $88.9 billion in the second quarter, compared with $63.4 billion a year earlier. The company’s online store sales surged nearly 48% to $45.89 billion its second quarter ended June 30, 2020.

Net income surged to $5.2 billion in the second quarter, or $10.30 per diluted share, from $2.6 billion, or $5.22 per diluted share, in second-quarter 2019. Operating income increased to $5.8 billion in the quarter-end on June 30, from $3.1 billion in the same period last year.

“We are reiterating our BUY rating for Amazon.com, while increasing our price target to$3,800 from $2,625. Our new price target is based on our updated discounted cash flow model, including our long-term adj. EBITDA margin forecast 22.0% (unchanged) versus 15.4% in 2019,” said Tom Forte, senior research analyst at D.A. Davidson.

“COVID-19 has been like injecting Amazon with a growth hormone and is driving sales expansion in ways that even the rollout of one-day Prime shipping was not able to. The company indicated it expects $2 billion of incremental spending to combat COVID-19 in 3Q 2020, down from more than $4 billion in 2Q 2020. As we expected and consistent with the CIO survey led by our colleague, Andrew Nowinski, its cloud computing sales growth decelerated in the quarter to 29.0% from 32.8%,” he added.

Amazon’s shares rose over 70% so far in 2020, registering its biggest quarterly rise of more than 40% in the June quarter.

On the third quarter 2020 guidance, Amazon.com forecast its net sales between $87.0 billion and $93.0 billion, or to grow between 24% and 33% compared with third-quarter 2019 and operating income is anticipated between $2.0 billion and $5.0 billion.

“First, U.S. retail inflecting as Amazon.com drives surging e-commerce, Second, this is global too as bottom-up work leads us to raise int’l retail, Third, expect ad revs upside, Fourth, Amazon.com adding record high-margin dollar growth, creating a path to $95 billion of ’22 EBITDA even with investment. Top pick; Bull case to $4,200,” said Brian Nowak, equity analyst at Morgan Stanley.

Executive comment

“As expected, we spent over $4 billion on incremental COVID-19-related costs in the quarter to help keep employees safe and deliver products to customers in this time of high demand—purchasing personal protective equipment, increasing cleaning of our facilities, following new safety process paths, adding new backup family care benefits, and paying a special thank you bonus of over $500 million to front-line employees and delivery partners,” Jeff Bezos, Amazon founder and CEO said in a press release.

“We’ve created over 175,000 new jobs since March and are in the process of bringing 125,000 of these employees into regular, full-time positions. And third-party sales again grew faster this quarter than Amazon’s first-party sales. Lastly, even in this unpredictable time, we injected significant money into the economy this quarter, investing over $9 billion in capital projects, including fulfilment, transportation, and AWS,” he added.

Amazon.com stock forecast

Thirty-eight analysts forecast the average price in 12 months at $3,242.66 with a high forecast of $3,800.00 and a low forecast of $2,162.00. The average price target represents a 6.25% increase from the last price of $3,051.88. From those 38, 36 analysts rated ‘Buy’, two analysts rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

Just after the earnings result, Keybanc upped its target price to $3,500 from $3,285; Canaccord Genuity raised its target price to $3800 from $3300 and BMO raised target price to $3500 from $2850. Morgan Stanley target price is $3,450 with a high of $4,200 under a bull scenario and $2,200 under the worst-case scenario.

Earlier this month, Suntrust Robinson raised the target price to $3,400 from $2,700, Deutsche Bank raised the target price to $3333 from $2750 and Wedbush raised the target price to $3,050 from $2,750.

We think it is good to buy at the current level and target at least $3,500 in the short-term and $4,000 in a best-case scenario as 100-day Moving Average signals a strong buying opportunity.

Analyst comment

“We went to a Buy from Neutral Rating in June at about 2600 and about 30% upside at the time. The stock has quickly hit our target with strong results. The max PE we use is 65X for conviction. Even though Amazon and other stocks have traded much higher than that, that’s our max. So keeping PE constant and factoring in the EPS upside (even though there’s a ton of upside coming) we’re moving to Neutral now that valuation wise our risk/reward is more even rather than upside,” said Chaim Siegel from Elazar Advisors.

“Retail trends accelerated. AWS revenues slowed but two-quarters of margin acceleration helps our EPS model. We have a big EPS upside if you scroll through our model. Still, at fair value, we’re moving to Neutral Rating.”